Ethiopia has witnessed rapid economic growth, with real gross domestic product (GDP) growth averaging 10.9% between 2004 and 2014, which is lifting the country from being the second poorest in the world in 2000 to becoming a middle income country by 2025, if it continues its current growth trajectory.
Fueled by substantial public infrastructure investment and a conducive external environment, the country’s growth has been stable, rapid and it has managed to decrease poverty substantially from 44% in 2000 to 30% in 2011, according to the national poverty line, according to a new World Bank report, Ethiopia’s Great Run: The Growth Acceleration and How to Pace It. The report, launched today, traces the reasons behind the impressive growth and also puts forth policy suggestions on sustaining it.
“Ethiopia began to see accelerated economic progress in 1992 and it shifted to an even higher gear in 2004, pulling millions of people out of poverty and leading to improvements in other areas like improved life expectancy and reduced child and infant mortality,” said Lars Christian Moller, the World Bank Group’s lead economist for Ethiopia and the lead author of the report. “To continue the impressive run, Ethiopia needs to continue its reforms efforts to further strengthen its growth foundations.”
- Services and agriculture have largely contributed to the growth. Initially, agriculture was the main contributor to growth but aided by a construction boom the services sector has taken over. Services contributed 5.4% to the GDP growth rate, followed by agriculture at 3.6%.
- Ethiopia witnessed accelerated growth as service sector began to rise. The shift of workers from agriculture to service and construction contributed to a quarter of Ethiopia’s per capita growth from 2005 to 2013. It was also complemented by a marked increase in the share of working-age population, the so-called demographic dividend, which can be attributed to up to 13% of per capita growth from 2005 to 2013.
- Rapid growth in the agriculture sector contributed significantly toward poverty alleviation. Each percent of agriculture growth reduced poverty by 0.9%. Yield growth averaged about 7% per year while the country registered a 2.7% annual increase in cultivated land.
- Public infrastructure investment has been a key structural driver of growth. With the country enjoying a long spell of relative peace, the government has been able to prioritize capital spending over consumption within the budget. In an analysis of 124 countries over four decades, the country was among the fastest 20% in infrastructure growth in the past decade.
Three policy recommendations to sustain high growth
- Private investments will have a key role to sustain further growth – and in order to do so, they need to be supported through credit markets. According to six different survey instruments, access to credit is mentioned as one of the top three most binding constraints for the private sector and more binding than infrastructure concerns. Providing more credit for private companies would arguably help the Ethiopian economy. The government could institute two policy reforms – (i) To continue the existing system but to direct more credit toward private firms compared to public infrastructure projects; (ii) To gradually liberalize interest rates to better reflect the demand and supply for savings and credit.
- Alternative sources of financing infrastructure needs to be identified. With Ethiopia having the third largest infrastructure deficit in Africa and infrastructure being one of the most important drivers of economic growth, Ethiopia needs new mechanisms to finance infrastructure as past financing options could have an impact on other areas most notably crowding out the private sector in the debt markets. Other financing mechanisms including raising tax revenues, increasing private sector involvement, and improving public investment management can be considered.
- Need to tap into the growth potential of reforms. If Ethiopia can catch up with its peers in Sub-Saharan Africa in terms of financial modernization, its per capita GDP growth rate would increase by 1.9% per year. While Ethiopia has so far modernized its merchandise trade, the country could reap rewards by reforming the service sector. In doing so, it can benefit from the lessons of other countries and tailor reforms to its own circumstances.
Moving forward, the report also proposes a series of indicators that would monitor the trade-offs that could occur while implementing the current growth strategy. This could provide early warnings to policy makers and help initiate reform efforts to sustain higher growth.
Source: World Bank